Good day. And welcome to the Philip Morris International Second Quarter 2019 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session [Operator Instructions]. I will now turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir..

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2019 second quarter results. You may access the release on www.pmi.com or the PMI Investor Relations app.

A glossary of terms, including the definition for reduced risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures are at the end of today’s webcast slides, which are posted on our website.

Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. Comparisons presented on a like-for-like basis reflected pro forma 2018 results which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges, Inc. effective March 22, 2019.

Today’s remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today’s presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements.

It’s now my pleasure to introduce Martin King, our Chief Financial Officer.

Martin?.

Thank you, Nick. And welcome ladies and gentlemen. Building on our encouraging start to the year, we delivered very solid performance in the second quarter, notably reflecting positive momentum for both our combustible tobacco and smoke free product portfolios and strong currency neutral adjusted financial results.

Key among our strength in the second quarter was our volume performance. On a like-for-like basis, total shipment volume declined by 0.7% in the quarter and increased by 0.1% June year-to-date. This performance was better than we had anticipated notably driven by the EU region.

Heated tobacco unit shipment volume increased by 37% to 15.1 billion units in the quarter driven by the EU region, Eastern Europe region and Japan. Second quarter net revenues increased by 9% excluding currency on a like-for-like basis driven by higher HTU shipment volume and favorable pricing for our combustible tobacco portfolio.

Our performance was flattered by the timing of pricing in certain markets compared to the prior year, which contributed an estimated two percentage points to net revenue growth. RRP net revenues reached nearly $1.5 billion in the quarter or nearly 20% of PMI’s total net revenues.

IQOS devices accounted for approximately 14% of RRP net revenues compared to approximately 19% in the second quarter of 2018. We recorded a strong like-for-like combustible pricing variance of over 6% in the quarter, driven notably by Germany, Indonesia, Japan, the Philippines, Russia, and Turkey.

We have recently increased our cigarette prices in markets such as Mexico and Ukraine, which should further contribute to a positive pricing variance over the balance of 2019.

On a currency-neutral like-for-like basis, adjusted operating income increased by 15.7% in the second quarter, while adjusted operating income margin increased by 240 basis points.

The strong margin expansion was driven primarily by favorable geographic volume from high cost geographies with relatively high unit margins, notably markets in the EU region. Like-for-like adjusted diluted EPS increased by 15% excluding currency, driven by our strong business performance.

Our total international market share, excluding China and the U.S. increased by 0.1 percentage point to reach 28.3% in the second quarter. This growth was driven by heated tobacco units, which increased by 0.5 points to reach 2.1% reflecting broad based share gains across the EU region and in Japan and Russia.

In the markets where I QOS has been commercialized, our HTU brands recorded a total combined share of nearly 5% in the quarter, despite not yet being fully distributed in many of them.

Our share performance for cigarettes in the quarter reflected continued adult smoker out switching to IQOS as well as an estimated adverse impact of a proxy point two points related to Turkey, due to the timing of price increases vis-à-vis the competition. We expect our share performance in Turkey to improve over the balance of the year.

Turning now to RRPs. We surpassed 11 million IQOS users as of quarter end. Approximately 70% of the total or some 8 million IQOS users have stopped smoking and switched to IQOS with the balance in various stages of conversion. In the EU region, HEETS continued its sequential quarterly share growth increasing by 0.3 percentage points to reach 2.4%.

This growth reflects success across a broad range of markets with varying regulatory frameworks and adult smoker preferences. We have achieved significant progress with IQOS across the region over the past year as evidenced by the HEETS market shares shown on this slide.

This includes strong growth in some of our larger markets such as Italy, Poland and Germany as well as even faster growth in other markets, such as the Czech Republic, Greece, Latvia, Lithuania and the Slovak Republic.

HEETS continued its strong performance in Russia in the quarter, with sequential in market sales growth of over 23% and national share of 29%. As a reminder, our first quarter HEET share was flattered by the impact on the total market of seasonally lower cigarette industry volume.

In market sales volume progression therefore remains a more realistic indicator of the brand's trajectory. For reference, we estimate a first quarter adjusted share of 2.3% implying sequential share growth of point six points in the second quarter.

We continued our geographic expansion during the quarter, and are now commercializing IQOS in cities representing an estimated 40% of the market by total industry volume, compared to approximate 32% at the end of the first quarter.

In Japan, our total share for HeatSticks and HEET increased by 1.1 points versus the second quarter of 2018 to reach 16.6% further demonstrating that the initiatives we introduced during the second half of last year are paying off and driving a step up in our share performance.

After adjusting for the impact of estimated trade inventory movements, which benefited our first quarter share this year, our share was stable on a sequential basis. We continue to anticipate greater competitive activity in the category as the year progresses.

While this may increase competitive churn among adult consumers over the short term as they try new products, we ultimately view this as a positive development for the category overall and for IQOS in particular.

As I will cover later in my remarks, we're investing behind further enhancements to the IQOS 3 device in 2019 to reinforce the brand's leadership position. Importantly, share for both the heated tobacco category and our heated tobacco brands continued to grow sequentially in the quarter, based on the latest consumer off-take share data.

In Korea, the heated tobacco category continues to be highly competitive particularly in the area of non-menthol flavors and related new taste dimensions. Share for HEET declined by 0.7 points and was stable on a sequential basis at 7.3%.

This performance was flattered by the impact of inventory movements as seen from the adjusted market share progression. We attribute the current share dynamics mainly to competitive churn as new devices and consumables from the competition have entered the market and experienced initial trial.

We plan to broaden our portfolio of HEET to better address the unique taste preferences of adult tobacco consumers in Korea and have related launches scheduled for the second half of 2019. In addition, like Japan, Korea will be an initial focused geography for the upgraded IQOS3 device.

It is important to remember that aside from Japan and Korea, our focus for IQOS across most launch markets remains targeted to key cities. These city level shares compare very favorably to the corresponding national shares and provide an encouraging indicator of the greater opportunity that can come with broader focus and support in IQOS markets.

Before closing on IQOS, I would also like to reiterate our excitement over the prospects for IQOS in the U.S. As a reminder, on April 30th, the U.S. Food and Drug Administration confirmed that the marketing of IQOS is appropriate for the protection of public health and authorized it for sale in the U.S. We are excited to bring IQOS to the U.S.

market to an exclusive license with Altria Group, Inc. whose subsidiary Philip Morris USA has the market expertise and infrastructure to ensure a successful launch, beginning with the initial lead market of Atlanta Georgia.

Turning to our full year outlook, we are raising our 2019 reported diluted EPS guidance at prevailing exchange rates to be at least $4.94.

The $0.07 increase compared to our prior guidance on May 1st of at least $4.87 was be driven by stronger business performance primarily reflecting better shipment volume and a tax benefit of $0.04 related to a reduction in estimated U.S.

federal income tax on dividend repatriation for the year 2015 to 2018, partly offset by asset impairment and exit costs of approximately $0.02 per share related to a plant closure in Colombia as part of our global manufacturing infrastructure optimization.

Our guidance continues to include an unfavorable currency impact at prevailing exchange rates of approximately $0.14 per share with just $0.01 in the second half of the year.

Items outlined on this slide, our forecast represents a projected currency neutral like-for-like increase of at least 9% versus our pro forma adjusted diluted EPS of $4.84 in 2018. Our increased guidance now assumes a total shipment volume decline of approximately 1% on a like-for-like basis versus a decline of 1.5% to 2% assumed previously.

We continue to anticipate full year HTU shipment volume broadly in line with our in market sales volume with any net inventory movements in individual markets essentially offsetting on an aggregate basis. For the industry, we now estimate a total volume decline in 2019 of approximately 2.5% excluding China and the U.S.

which is at the low end of the previously communicated decline range of 2.5% to 3%. Our increased guidance further assumes like-for-like net revenue growth excluding currency of at least 6% compared to the assumption of at least 5% in our prior guidance.

We also now expect IQOS device net revenues to account for less than 20% of our total RRP net revenues in 2019. The change from the previously communicated range of 20% to 25% primarily reflects the favorable geographic mix impact related to HTU shipment volume that I noted earlier.

We continue to anticipate a full year like-for-like combustible pricing variance above 5% supported by our June year-to-date variance of 5.2%.

This positive top line momentum provides us the opportunity to further increase or advance investment behind IQOS in order to accelerate product and commercial development, expand distribution in both existing and new geographies during the second half of 2019, further enhance the IQOS3 device in 2019 to reinforce the brand, and strengthen our category leadership as competition intensifies.

Consequently, we now anticipate net incremental investments behind RRPs this year of approximately $400 million compared to our previously disclosed estimate of approximately $300 million. With the majority of the 100 million step up in investment expected to occur in the third quarter.

We believe this increased investment will reinforce the positive momentum behind IQOS heading into 2020. Despite the increased investment, we are maintaining our assumption of currency-neutral adjusted operating income margin expansion of at least 100 basis points on a like-for-like basis.

While we don't give quarterly guidance, I believe it is appropriate to provide some additional visibility on the third quarter in which we expect currency-neutral adjusted diluted EPS to be essentially flat compared to our pro forma adjusted diluted EPS of $1.35.

This estimate assumes a like-for-like currency neutral net revenue growth rate in the quarter slightly below our full year assumption. As I noted earlier compared to last year, our second quarter net revenue growth benefited from the timing of price increases in certain markets and some of this benefit will be offset in the third quarter.

We also face a challenging combustible pricing comparison versus the third quarter of 2018, our strongest quarter for pricing last year. Coupled with our top line assumption, our third quarter EPS estimate also reflects higher expected costs on a like-for-like basis.

This is primarily due to our net incremental investments behind RRPs with about half of the full year total of approximately $400 million expected to come in the quarter. Turning to cash flow.

We continue to anticipate full year operating cash flow of approximately $95 billion subject to year-end working capital requirements as well as capital expenditures of approximately $1.1 billion. In conclusion, we're building upon our promising start to the year and delivering a very solid performance in the second quarter.

The fundamental supporting our strong combustible tobacco portfolio are intact. The favorable momentum for IQOS continues across geographies, further supporting our confidence in our HTU shipment volume targets of 90 units to 100 billion units by 2021.

Finally, on a currency-neutral like-for-like basis, we have increased our full year 2019 growth assumption for net revenues to at least 6%, and our anticipated full year 2019 growth rate for adjusted diluted EPS to at least 9% further demonstrating our overall confidence in PMI short and long term growth prospects. Thank you.

I'm now happy to take your questions..

Thank you. We will now conduct the question-and-answer portion of the conference [Operator Instructions]. Our first question comes from Adam Spielman of Citi..

Hello, thank you very much. I guess, I have two questions. Clearly, you've guided both to better volumes for the markets and more -- on a bigger improvement for yourself.

And I was just wondering, where what has surprised you and what geographies you're talking about particularly in terms of a market, and in terms of your end volumes as you think about 2019? That's my first question, thank you..

It's fairly broad based, but I would call out the EU as the one area that is exceeding its previous run rate or and maybe surprising us a little bit to the positive this year. Poland is one market that's doing well. I mean, it's overall EU run rate used to be around 2% to 3% and now we're seeing it running more like 1% to 2%.

With so far this year, it's been quite encouraging. But we're also seeing pretty good volumes across a number of other geographies the Turkish market in the first half of the year is still up.

Indonesia market has started to grow again with no tax increase and with limited pricing this year because of not having the tax, and you have a couple other markets at least for the first half of the year that are benefiting from lapping some previous big tax increases and so forth like Saudi is up compared to last year, Thailand is up pretty strongly even though it's not such a big market but it is a pretty strong size growth there.

So it's fairly broad based, but I would -- I would pick out the EU is the one that's probably a little bit more than what we expected..

And just the market, and for you specifically is it just, I guess, our peers are doing better than expected or is there anything else, or is it just the those are favorable markets here, Indonesia Turkey, EU, Saudi all big markets where you have decent market shares?.

Yes, well I mean you see our overall share is benefiting from heated tobacco units. And even within the cigarette category, we're doing pretty well.

We called out this quarter wasn't quite as favorable as last quarter on cigarette share, but Turkey was one of one of the main reasons and the issue in Turkey was that, we increased prices and we're the only ones in the market with the higher prices for about a month.

The competition lagged a bit, and so we lost quite a bit of share in the second quarter. However, competition has lost and we don't expect -- Turkey with Marlboro in Parliament. They're recovering quite quickly. So that was a bit of a Q2 anomaly.

So overall our share in cigarettes, within cigarettes is holding up very nicely and of course we're benefiting from the overall strategy of leading the heated tobacco space as you know approximately two out of every three consumers coming in the category are coming from the competition.

So overall our share is holding up very nicely we're quite pleased with it..

And just very quickly. A second point, you mentioned at the beginning a couple of times, but you had more pricing variance this quarter. And I guess you implied there's going to be sort of slightly reverse in Q3 because the impression you gave was you took earlier prices in 2019 than you did in the corresponding markets in 2018.

But I was just wondering sort of can you be a little bit more specific about what markets you're talking about? And also why did you do that? It seems a sort of slightly strange thing to do. It's a bit more of a color around that pricing variance thing moved a bit further forward in the year..

Yes I mean, first of all with pricing you kind of take it when you can get it. It's not that we try to stick to a certain schedule. We read the competitive situation and the overall gaps and various other measures and we take the pricing is as we think we can achieve it.

One market to call out as having shifted from where it was in Q3 last year into Q2 this year is Mexico. So you had the trade movements benefiting Q2 and the pricing benefiting Q2 this year where it was in Q3 last year.

And the other piece on the comparisons to last year is, last year’s pricing variance in Q3 was very large, it was the biggest of any of the quarters. It was $483 million.

So just because of the way the timing works out and the different sequencing, you get some quarters that are bigger than others, and when pricing moved from one quarter to another, it can have a pretty significant impact on the total revenue line.

So yes, 9% total revenue growth in quarter two ex-currency like-for-like is very, very strong, but it is flatter by these movements by about 2%. So we wanted to call that out, and also make sure people understood the impact as we make the comparison against Q3 coming up..

Again, I've got lots more questions, but I'll leave it at that, so that the other folks have a go. Thank you..

Okay, thanks Adam..

Our next question comes from Judy Hong of Goldman Sachs..

Thank you. Hi, Martin..

Hi Judy..

So my first question is just your decision to spend incremental hundred million behind IQOS this year. I know you kind of gave the big buckets of where you think the investment will go, but I guess, I just wanted to get a little bit more clarity around just some of the specific programs and in mind for the spending.

And then if we should think about this as more of a pull forward from kind of the planned spending next year as the underlying momentum has come in a bit better than expected..

Okay. Yes, I mean there are a couple of broad areas where the spending will help us maintain our momentum going into next year and really beyond. I mean one is, to accelerate the development of innovation of both the product side and on the commercial side and that will have more of a long term benefit.

I mean that's something where it's not likely to help us this year, but it will help us next year with some of our innovation coming out at a faster pace and some additional projects that we can we can accomplish.

So that's more of a long term investment, and very much a confidence on our strategy and realizing that, that in order to stay ahead of the competition we've got to continue with our innovation pipeline. The second piece is around geographic expansion.

We've had great success in Russia and the EU, and we've pointed out that geographically we still have opportunities to expand in both areas. So accelerating those plans ahead of more competitive presence is prudent.

And then we also have some new geographies that we will open in the second half of the year and funding that appropriately to get off to a really good start is I think an excellent use of additional investments to get momentum going into next year.

And that's really what I would sort of say staying ahead in the areas where we're -- where we're doing well and opening up some new areas. And then the third bucket is investments to address intensifying competition. I mean, I guess the best examples that are going to be Japan and Korea. We do have new innovation improvement on our IQOS3 device.

And we want to get that out there in a in a big way and benefit from it. It's an excellent innovation and it helps us have news and, and a reason for IQOS users to really stick with IQOS in the face of having lots of other products being offered to them and so forth.

And then there's also in that same bucket I think commercial activities, which I won't specify, but which we will put aside some additional investments for given that the competition is putting more intensity into these markets as they realize that they need to try to catch up in the reduced risk space that we've built.

So those are I think prudent investments. It's about momentum and it's a bit of success, breeds success because we've been able to do well this year and get ahead. And then that allows us to up the ante and keep our momentum going, not just finishing this year well, which we need to do, but more importantly for next year and beyond.

These are these are long term plays so I hope that covers that Judy..

Yes, that's helpful. I guess a bit of a follow up and my second question was actually going to be on Japan and Korea and some of the competitive dynamics that you've talked about. I guess in Japan, you've had some new activities in place now for I guess six, six months plus, market share being kind of flattish.

How would you think about that in the context of some of the investments that have already been made? And then, can you be a little bit more specific in what the improvement on IQOS3 devices that that we'll see with the launch in the back half? Thanks..

Okay. So, for Japan, I mean, we have to keep in mind that we're up 1.1 share points year to-date over last year. So yes, sequentially we only had very slight growth on an offtake basis from Q1 to Q2, but that's already on a base that's well stepped up from our run rate last year. So, our initiatives are clearly working.

The introduction of HEETS at the different price point and with the different taste lineup to attract the different consumer group is definitely working, its incremental share we're getting, and it's more mainstream brand that opens its access to more consumers. We've had very good feedback on the IQOS 3 and MULTI.

The battery works better charges between usages for IQOS 3 much quicker. The design it is well received. And the evidence is that despite the price tiering where 2.4+ is available in the market at a lower price nearly all of the purchases and all the volume, the vast majority have gone IQOS 3 and MULTI.

So it shows that the consumer there has appreciated that innovation. And our salesforce is working effectively to convert adult smokers that overall category has grown and as I mentioned before our HEETS and HeatStick share has grown and we expect that to continue going forward.

Now obviously there is going to be some more competitive activity in the second half. So we'll see out there may be some short-term impact with consumers trying other products and so forth, but we're convinced that our product is still the best choice in the marketplace and we're to keep investing behind it.

And the IQOS 3 improvements we think will help consumers see new innovation from us as well as the competitive offerings. I'm not to get any further details on what that improvement is as you can imagine we'd like to keep it in surprise for now. But I think its improvement that consumers will really appreciate.

Pleased with Japan's performance; obviously we're watching very closely the competitive situation and that certainly – the first half of the year only behind us. We still have the second half to go and I think that's one area where we have to keep our eyes short and make sure we're addressing the competitive situation in Japan as well as in Korea..

Great. Thank you so much..

Our next question comes from the line of Bonnie Herzog of Wells Fargo..

Alright. Thank you. Hello, Martin..

Hi, Bonnie..

Hi. I wanted to also ask about a little bit further on some of the things that you are just discussing.

And I kind of wanted to hear maybe more specifically how consumers have been responding to more of the competitor innovation that's been rolling out in the market? Are they simply trying the new renovation and then possibly coming back to IQOS? Or do you think you're experiencing some share loss as these consumers are switching or is it possible that some of the new innovation by your competitors is helping to convert more smokers and driving a larger reduced risk markets?.

I would say that, it's different between the two markets, between Japan and Korea. In Japan, I think we have seen the period of churn and we have more consumers that are actually settling back with IQOS. Obviously, there would be a new wave of expansion coming from some of the device sales especially from JT, so there maybe another phase.

But overall in Japan I think the initiatives we took are having a good affect, our share growth is up from last year nicely and we see that our position is pretty firm and that we're growing the category and growing our share moving forward. So, in Japan well obviously we'll keep an eye on the competition. We feel pretty confident going forward.

In Korea, it's a little bit more intense competition. KT&G's device has a lineup of consumables in a taste direction, non-menthol flavors that are kind of unique to Korea if you will. Korea is a country that has an overall trend not just in tobacco but in other categories of all kinds of exotic flavors and its present in the tobacco area as well.

And KT&G has done a very good job of capitalizing on this.

It's not just by the way in the area of heat-not-burn, it's also in the cigarette category that they have put out a large number of new offerings with all kinds of exotic flavors, but within the heat-not-burn area we feel more confident to respond and offer some additional flavors in our lineup and we will come with that in the second half of the years.

So we'll have to see how those competitive responses get traction. We think we will do better going forward and we're also putting more attention to conversion and some of the other activities in the marketplace in Korea.

But right now our results in Korea are in need of some remedial action and that's we're taking, going forward in the second half of the year, whereas in Japan I think we're on firm footing and we're quite confident going forward..

Okay. That's help. And then in light of all this as the competitive landscape intensifies; how or where you seeing pricing heading for reduced risk products? How concerned are you that pricing is going to start to roll back and effort for possibly you to defend share.

Just trying to get a sense of the evolution of pricing in the reduced risk market over time?.

Well, I think you need to separate out consumable pricing versus device pricing. On the consumables we have absolutely no indication of any sort of pricing issues or skirmishes. And in fact for example in Japan when overall prices went up last year with the tax increase, the pricing went through on RRPs as well as on cigarette.

And we don't see any sign anywhere of the actual, consumables being a big issue from the pricing perspective. Now on the devices, there are some countries where the competition has offered very low prices on devices.

We are always priced well above competition and surgically and where necessary we have and we'll continue to offer discounts to promotions to keep our devices from being too high on price and we will need to keep doing that.

But that's a much more manageable issues, I mean the value of converting a consumer it's really in the consumable and making sure that you're in the mix for devices on device pricing is a relatively more manageable economic challenge than having to do with the consumable side. So overall I would say pricing in the category is not a major issue.

Its small skirmishes in certain countries, certain places with the devices where we're going to have to continue to make sure we're being competitive..

Okay. That's helpful. And just one final quick question on your guidance from me. You're increasing your spending slightly, but you noted you still expect your margins to be just as strong.

So, can you highlight for us what the key offset is or what is expected to perform better specifically as it relates to your margins?.

Well, I mean, I think that the top line increase allowed for a bit more spending while keeping the margin still where it was before, and I think if you put that through the model I think you'll see that's more or less what it is. I mean, obviously we're very mindful of our spending and working hard to get efficiencies.

You see us moving forward on our footprint as we've announced some factories. We did Pakistan before. We're doing Columbia now. We've announced the intent and the beginning of consultations on Berlin. We're working hard internally on our cost categories and bringing cost out and so forth.

But most of those benefits you'll see more going forward in the next few years. It's not showing up so much already this year because you have to take the actions and of course incur the cost and treat people fairly and properly and then you get the lower cost base in the out years.

So I think the 100 million is really within the realm of the higher revenue and keeping the EPS growth 1% higher as well..

All right. Thank you..

Our next question comes from the line of Pamela Kaufman of Morgan Stanley..

Hi. Thanks for the question. In your comments about step-up of investment investing in Q3, you alluded to accelerating investments behind innovation. Will this happen specifically within heat-not-burn? Or will you be investing more behind vaping product.

And also, what are your thoughts on M&A in vaping to extend your presence in the category?.

Yes. The investments are across several platforms including e-vapor. We continue with our plan to roll out the first initial market with – improve the cigarette with the mesh technology and then improved form factor and we're very confident that that product will be superior to what's in the marketplace.

So we're continuing to vest behind the capacity ramp-up for that and we want to ramp the capacity as fast as we can and get to as many markets as we can next year.

As far as timing on spending, if you take the total of 400 million that we're now communicating on spending, about $120 million has been spent the first half leaving us about $280 million and then we said about 200 or half of the 400 will come in Q3. It's across various categories, not just the innovation you're asking about.

But it's a broad-based commitment to the smoke-free future and all of our activities across commercial as well as product platforms as well as commercialization..

Thanks. And how are you thinking about IQOS's ramp in the U.S.

Can you help us think about the potential contribution to your results as it scale?.

Well, I mean, I think we start with looking at the prospect for IQOS in the U.S. and I think it start with the consumer receptivity. And in our estimation U.S. consumers are very open to trying new products not just in the area of reduced risk tobacco product by the way, but also all products in general as compared to many other countries. U.S.

consumers tend to embrace innovation pretty readily. And you certainly see it with the cigarette category and some of the other categories in the U.S. where consumers are trying to product, so that's a plus. There's a pretty clear regulatory approach and we got clear guidance from FDA on some of the aspects of introducing this product in the U.S.

There's good communication freedom that will help build awareness and trial amongst adult smokers. And then you've got Altria and PM USA. They have excellent execution ability. They're well prepared. They got a very strong plan. We've been working with them to share all the learnings, very good cooperation. So we expect the U.S. to perform quite well.

I mean, we would expect it to be faster on average than the EU has developed. I mean I think you have to be realistic. I wouldn't assume that it’s going to take off like Japan did or Korea initially et cetera, but we expect U.S. to have very solid results. Now, of course, has yet to be started.

We'll find out a lot from the Atlanta beginning and then we'll take it from there. But we have very high hopes and we're working very well together without you to make this a success..

Thanks. And one last question from me.

Just curious about your early read on the competitive dynamics, from JUUL International expansion in Europe and Asia?.

Well, it is early days for JUUL. We're not seeing certainly any impact from JUUL on our overall results. As you can see there's really nowhere that we're having any issues with it, but it is early days. We're watching it closely.

I mentioned staying ahead of competition with expansion and staying ahead of competition, it's mostly we're talking about heat-not-burn, but it’s also quite frankly with an eye toward JUUL as well and making sure that we get as much awareness and trial and presence throughout the EU and Russia and places like that as we have this great momentum and we're doing extremely well and as within eye also to the fact that others are coming amongst them JUUL.

So we have our eye on it. We're taking steps including with the e-cigarette platform for investment and rollout that we talked about and I mentioned earlier to make sure that we're going to compete well with JUUL. Nonetheless of course there's room for more than one on successful product in this category and JUUL will likely get some success.

So we're realistic about it as well..

Thank you..

Our next question comes from Robert Rampton of UBS..

Good morning. Three questions from me.

The first question is -- so your disclose market for down around 1%, if you could help me with the bridge to the 2.5 for the full year?.

The 2.5 is a reference to the total market for tobacco and heated tobacco units worldwide and the 1% it's our shipment rate. So, I'm not sure. Maybe I didn't get your question..

So, I'm referring to your key market data at the back which says the total market units were down 1.1%.

I appreciate that doesn't cover 100% of your [Indiscernible] I guess what I'm asking is, what did the industry do in 1H and then how do we bridge from that to the full year?.

The total industry in the first half was down a bit less than the two and a half and would be down a bit more than two and a half, obviously, in the second half to bring it back to that. I don't have the exact number..

Yes. I mean there's going to be pricing throughout the year and you have a normal decline rates throughout various countries. Turkey's pricing that went into effect in April in Turkey.

Turkey was growing quite rapidly last year and into the first quarter, but obviously it was a pretty big tax hence we've now taken pricing to Turkish Lira per pack, so that market price won't grow quite as fast as it was.

I mean there's various market events that infer that the second half will be a bit weaker than the first half for both total market and for our own shipments too by the way because we're more or less flat in the first half. We're saying we're going down one for the year, so obviously our second half shipment volume will be down roughly to 2%.

Does that help, Robert?.

Yes. That's very helpful indeed. So next question was on inventory in Japan, so last year there was a 4, 3Q there was a 4 billion gap between your shipment number and you’re in-market sales.

I mean clearly some of that will be loading ahead of the tax change, but how should we think about the lapping of that in the context of the difficult pricing comparatively flat?.

Yes. I mean, there are couple moving parts in Japan that have impacts on inventories especially one quarter the next. I mean as you point out we had the pricing last year. We obviously drew down the inventory because we had a different projection for the market than what we started the year.

This year you have a VAT increase expected October 1st going from 8% VAT to 10% VAT. That's across the whole market not just tobacco, but all products. But obviously, consumers are going to expect that there might be some pantry loading and trade movements from that.

There's also a health warning change coming next year, so inventories have to be managed to deal with that. So there are quite a few moving parts.

I mean, obviously, we've made the statement that overall worldwide we expect total heated tobacco unit shipments to be more or less in line within market sales, in other words if there's inventory up in one market down in another market, but overall it should be more or less flat.

I can't really give you that individual where each market is going to end up. Even Japan given these many moving parts. And you have to remember inventories are really set.

As we go into the end of the year with an eye towards what we think is going to happen in the next year that's the whole reason to have the inventory, is decide as to what's coming and what events are coming as well.

So it's a bit difficult to give you any more details on what's coming up for inventories other than that broad statement that we expect in market sales and shipments to be approximately the same this year and not have big inventory differences..

Okay. That makes sense. Sorry, one last question just in terms of IQOS share in Greece and Bulgaria, that moved backwards quarter on quarter, obviously I'm not trying to say anything about in proposition, but I'm just wondering in those markets.

Is that a function of the bigger weight of 2Q versus other quarters or is it a case that you get to a certain point in development of a market where you start getting the initial churn or is it you've redirected resource?.

Well, I mean you have to keep in mind there's some volatility in the numbers, but if you look at Greece the share is 8.1, up four from the prior year, so it's doubled, right? So there might be just like we saw in Russia for example where the overall IMS is growing at a very steady, very nice rate.

But you saw the share moving around, Q1 was overstated because of cigarette seasonality and now when you when you look at the underlying and understand the situation the Russia share growth has been growing and growing steadily. But it's distorted by these other movements and its similar things happen in other markets.

But when you look at the longer term both you called out Greece, it's doubled in the last year to 8% up 4%. Bulgaria's is more than double. It's grown two and a half to four and a half. So when you look at one quarter to another quarter with those kinds of growth rates I don't think that's really the best way to look at it.

But we're growing well in both those locations..

Okay great. Thanks very much. Appreciate the time..

Our next question comes from the line of Michael Lavery of Piper Jaffray..

Thank you. Could you just unpack the third quarter a little bit more and especially in light of the VAT increase in Japan and what should be relatively profitable trade loading.

How should we think about the revenues still in the quarter being below your full year range? And why would that be the case?.

Well, I mean, one of the biggest impacts is this timing that we talked about, where the Q2 is benefiting by about two percentage points. And that's obviously going to drag on Q3 on the top line. And then when you look at it year-over-year we had this very large pricing variance last year of $483 million.

And while we'll have decent pricing this year as well, it won't be nearly that big in the quarter. And you add to that this spending step up which is very much concentrated in that quarter. And that's how we get to the overall picture of essentially flat with the pro forma from last year at 135. I mean that's pretty much the basics of it.

I mean obviously there are individual events in certain countries like Japan and so forth in one year to next year. But if you look at the bigger picture those are pretty big movements and significant numbers that affected. I remember last year Japan had a price increase in the same pattern, right? It was October 1st.

So you had trade loading and et cetera. So when you do it this year you have a VAT instead of the price -- instead of the tax, I'm sorry. But you have a similar potential for trade dynamics that are at really the same date. So I don't think that that's going to be a big driver of it year-over-year..

Are you anticipating having pricing go through with this tax hike as well?.

We never discuss forward pricing. The VAT is going to go up, that's all we can really know at this point in time. We'll have to see what happens as far as any anything else. And we usually have to discuss with the government you're pricing ahead of time and so forth, so it's not always very clear as to what's going to happen..

Yes, of course. And just back on the spending piece of it, can you unpack the incremental 100 million a bit. You mentioned that half of it is going to fall on the third quarter.

Is the rest in the fourth? Or has some of that already happened?.

Just to be clear, we took the 100 million increase added it to the 300 million that we had already said would occur. That's a total of 400. Half of that i.e. 200 million step up will occur we believe in the third quarter. That's why it's a pretty big impact. It's not just the 100 million.

It's 200 million of step up out of the total of 400 million that we expect to hit in Q3. That's why it's a pretty big impact..

That's helpful clarity. And some of that timing just driven by opportunistic ability to reinvest some of the momentum ahead of your plans.

Is that how the 3Q surge hits from the pacing perspective?.

Yes. I mean we've only spent 120 million so far this year in the first half. Some of it was by design and some of it was some timing slipping and some things like that.

As it turns out, Q3 is actually a very good time for us to step up this investment because we get some time through the year to benefit from the geographic expansions that we're going to do and we've been planning them already now.

There's much of that's out of the original 300, the 100 million on top as we go and try to address better some of the competitive situations and work on our longer term innovation. Q3 is when we can get things rolling and get -- the commensurate spending that goes with it hits the timing.

So yes, it just so happens that the concentration of the 200 out of the four falling into one quarter. But it's a variety of different things driving that..

That's helpful. And then just one more on the U.K. Obviously, it's been a -- there's some severe restrictions on your ability to communicate and market much about IQOSs, but it -- you're starting to expand in Bristol and Manchester now.

It also was in the news that there's been 100,000 devices sold in London over the last couple of years and some of those obviously could be in the hands of multiple, but people could have more than one, no question, but that might be something in the neighborhood of a high single-digit share of London smokers.

How is your progression in London? Is it gaining a little bit more traction and starting to have some good share runway there?.

Yes. I mean, our share in London is relatively small. It's above 1%. But it's relatively small. It's bigger in certain pockets like around Canary Wharf, West London, we have pretty significant share. We have really good conversion rates in U.K.

and London at 70%, so the people who do buy the devices successfully convert and for the most part quit smoking and switch completely to heat-not-burn. We're continuing to invest as you pointed out by opening stores in Bristol and Manchester. So we're making headway.

As you pointed out it hasn't been easy due to the regulatory setup and some other issues. We have to keep in mind London is like a crossroads of the world. So you have a lot of people to visit London that might buy a device, but not actually consume HeatSticks in London.

So when I give you market share, I'm talking about HeatStick offtake share, but obviously you would have devices that would be purchased by people visiting London from various countries. You might have also Londoners who travel quite a bit buying HeatSticks in the EU and bringing them back as long as they stay within certain limits they can do that.

And prices are much lower, say in Italy your price for HeatSticks in Italy is about significantly lower than what it is in London. So you get a lot of that going on. So I think probably London is a bit of a unique situation where the number of devices sold doesn't match up very as closely as you might think with the offtake share of the consumables.

But I think it's a worthwhile endeavor for us to keep working on awareness and conversion of people in London because it is a leading city in the world and one that helps set worldwide trends. So we keep chipping away at it. We are making progress. We'll continue to do that..

That's helpful. Thanks a lot..

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays..

Thank you for taking my question. And this is a follow-up on that question that was earlier on the sequential market share in Bulgaria and Greece. So if I look at Japan, IQOS stalled after having penetrated the early after market and the overall HTU category share has been stable at around 21%, 22%.

Now in Vilnius in Lithuania you were already at 20% share in Q1. And if we look at the Lithuania market share, they are up very slightly.

So what I'm trying to ask is, are you hitting the limits of early adopters in some of these Eastern European cities and countries already?.

Well, I mean, the only one that would be kind of at the level where you might think that there might be some challenging would be Vilnius which is at as you said 20%, and it really all depends on the dynamics of the pricing of the offer if you're running out of people that are in the premium category that can sometimes have an effect.

But overall it when you look at EU and even Russia, we still have quite a bit of runway to go before I think we'll start to hit issues where you say, I've converted the vast majority of premium smokers or I have converted the vast majority of the early adopters and innovators.

And even now, even when that starts to happen we're now much more prepared for that because we know obviously you need to be prepared to make sure you have offerings that span the different price tiers. You need to be prepared to have the messaging in place for different groups.

So, obviously it's something we keep an eye on and we build the toolbox to be able to move to a different strategy when you start hitting those levels. But in the EU frankly, I think we're still in aggregate anyway far far away from it. Keep in mind Lithuania and Vilnius are relatively small geographies within the EU.

So I don't see it as an overall issue for our growth rates in the EU. We're on a good trajectory and I expect us to continue to be growing nicely for quite some time to come. But we are prepared and aware of it and have the toolboxes and strategy for those sorts of situations. Thank you for your question..

Okay. Okay. Can I ask one follow up question? You are increasing your revenue growth guidance this year to 6% but not the three year guidance from greater than 5%.

So shouldn't that be also increased a bit now, because you are increasing the guidance in the first year itself?.

That's not how we've set up the three year. We gave it as a compound annual growth rate. Obviously when we get into next year, we'll give some guidance for next year and we'll see how things are going before we do that. We're not prepared to do that, and we wouldn't change the three year overall based on just this just this period..

Sure. Thank you. Thanks a lot..

Thank you very much..

And that was our final question. I'd like to turn the floor back over to management for any additional or closing remarks..

Yes I just wanted to leave three key takeaways. First one being, we've got very strong momentum as evidenced by our total volume, which is which is actually slightly positive on a like-for-like basis in the first half and it's both the conventional and the heated tobacco units which are performing well.

Second is that our strategy is working for the shareholders. We've got the top line benefits that are flowing through, with our margin expansion of at least 100 basis points currency-neutral that we expect for this year, and this has given us the confidence to increase our investment to maintain this momentum into 2020 and beyond.

We're focusing on the longer term, with the product and commercial development. We're focusing on geographic expansion. We're addressing competition to maintain our favorable competitive lead. And when you put all three of those things together, we're in pretty good shape for the first half of the year.

We definitely have still the second half to go and there's some countries in areas that we have to make sure where we're keeping an eye on amongst them, Turkey with the pricing in Indonesia, with some down trading and so forth.

We've got the increased competition on heat-not-burn, but when you put it all together, we're confident in the future and we're ready to have a good second half and move into 2020. So thank you very much for listening..

Thank you very much for joining us today on the call. If you have any follow up questions please contact the IR team. Again thank you very much and have a great day..

Thank you for joining the Philip Morris International Second Quarter 2019 Earnings Conference Call. You may disconnect at this time and have a wonderful day..